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ORDER UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH REGULATION 53A of SEBI (DEPOSITORIES AND PARTICIPANTS) REGULATIONS, 1996 AND SECTION 15HB OF THE SEBI ACT, 1992. AGAINST M/s EIDER INFOTECH LIMITED
BACKGROUND:
1. I was appointed as the Adjudicating Officer by the Chairman, SEBI, vide order dated September 30, 2004 to enquire into and adjudge the alleged contravention of Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996 (for brevity’s sake referred to as the Regulations) read with Section 15HB of the SEBI Act, 1992 (hereinafter referred to as the Act) by M/s Eider Infotech Ltd (hereinafter referred to as EIL) in the matter of their failure to appoint a common share agency for handling share registry work both for the dematerialised and physical securities.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
3. However, the show cause notice was neither acknowledged nor returned undelivered.
4. Thereafter, a notice of hearing dated June 28, 2004 was sent by registered post to EIL in terms of Rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, and vide the said notice, EIL was advised to attend the hearing proceedings to be held on July 9, 2004. EIL acknowledged the receipt of the notice of hearing vide its letter dated July 7, 2004 wherein they denied receiving any such show cause notice, and instead stated that they had already received a letter dated January 20, 2004 from SEBI regarding a personal hearing before the Member, SEBI for their alleged violation of Section 11B of the SEBI Act, 1992 and the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 to which they had submitted their detailed reply vide their letter dated February 5, 2004 denying the allegations raised therein. It was further contended that pursuant to their reply submitted to the Chairman, SEBI, they had not received any decision or order passed in this regard and hence pending completion of the said proceedings and passing of an order there upon, a copy of which should be served upon them by SEBI, no adjudication proceedings could be lawfully initiated against them. On the basis of the above, they sought for the present proceedings to be dropped. Copies of the cited documents were enclosed for perusal.
5. Upon perusing the said documents and keeping in mind the principles of natural justice as also the confusion prevailing at EIL as regards the nature of the present proceedings, another opportunity was offered to EIL vide notice of hearing dated October 15, 2004 wherein EIL was advised to attend the hearing proceedings to be held on November 25, 2004. Vide the said notice, it was clarified that the current proceedings were not being initiated under Section 11B of the SEBI Act, but for the alleged violation of Regulation 53A of the Regulations by EIL and to that effect, a copy of the show cause notice dated December 31, 2003 was enclosed for their information. EIL was advised to submit the documentary proof if any in support of their contentions at the time of the hearing and it was also made clear to EIL that in case they failed to appear for the said proceedings, the matter would be decided solely on the basis of the material available on record. In response to the same, EIL vide its letter no SEBI (Reply show cause/Enquiry officer/2004-7106) dated nil, merely reiterated their contentions made. However the rest of the letter dealt with EIL elaborately denying any violation by them in respect of certain share transactions, for which proceedings appear to have been initiated under sections 15H read with 11(2) of the SEBI Act, 1992. On the scheduled date of hearing, no body appeared on behalf of EIL. CONSIDERATION OF ISSUES:
6. I have taken into consideration, the facts and circumstances of the case, the material available on record, as also the relevant regulatory provisions.
7. Regulation 53A of the Regulations which came into force on September 02, 2003 reads as under: “All matters relating to the transfer of securities, maintenance of records of holders of securities, handling of physical securities and establishing connectivity with the depositories shall be handled and maintained at a single point i.e. either in-house by the issuer or by a Share Transfer Agent registered with the Board.” 8. In view of the above, it is imperative for all issuer companies to appoint a common agency to handle the share registry work relating to physical and demat shares of the company either in house or through a SEBI registered RTA. 9. The object of the appointment of the common share agency as is evident from the SEBI Circular No. D&CC/FITTC/CIR-15/2002 dated December 27, 2002, which required all issuer companies to appoint a common agency for handling all share registry work was to avoid: a) any delay in dematerialization, and b) Non-reconciliation of the share holding due to lack of proper co-ordination among the concerned agencies or departments, which was adversely affecting the interest of the investors. 10. Hence before the admission of any security into the depository system, it is necessary for the issuer company to establish electronic connectivity with both the depositories either directly or through a Registrar and Transfer Agent (RTA). 11. Regulation 53A of the Regulations in this regard is thus an important investor protection measure introduced by SEBI. 12. From the facts earlier mentioned, it is clear that despite granting sufficient opportunities to EIL to appear in person and present their case, the company did not submit any proof of their compliance of Regulation 53A of the Regulations or authorize anyone on their behalf to attend the hearing proceedings. On the contrary, they kept challenging the present proceedings on the ground of certain other proceedings initiated by SEBI inter alia under Section 11B of the SEBI Act and sought for additional six to eight weeks time to file another reply.
13. I have perused the documents submitted by EIL in this regard and noted that due to the alleged violation by EIL of interalia the provisions of Section 11B of the SEBI Act, 1992 a letter dated January 20, 2004 was issued by an officer of the investigation, Enforcement and Surveillance department calling upon EIL to appear before the Member, SEBI in this regard and present their case. EIL also filed an elaborate reply to the said notice issued by the said department.
14. As is evident from a reading of the notices of hearing referred to above, the present proceedings have been initiated for the alleged violation by EIL to appoint a common agency to handle the share registry work relating to physical and demat shares of the company either in house or through a SEBI registered RTA. However every attempt made to clarify the purpose of the present proceedings to EIL including by phone, proved futile in as much as EIL obviously failed to study the contents of the notice initiated in the present proceedings. Under those circumstances, I am of the opinion that sufficient opportunities have been granted to EIL to represent their case and hence do not consider it necessary to grant them additional 6 – 8 weeks time to represent their case.
15. Under these circumstances, EIL also failed to furnish any document evidencing compliance of the Regulations. In an attempt to procure any relevant material, the information available on the CSDL website was studied. From the same, it appear that EIL appointed M/s. Mas Services as its RTA for electronic share transfers while EIL itself is doing the physical share transfers in-house. As such there is no common agency dealing with both the physical and demat securities as required to be done in terms of the provisions of Regulation 53A of the Regulations. In the absence of any evidence being provided by EIL to counter the said finding, their violation of Regulation 53A of the Regulations is established.
16. Any evasion of the regulatory provisions issued by the regulator in the interests of the investors or non adherence to the same for any reason whatsoever is bound to affect the interests of such investors. Although such a loss cannot be specifically computed in monetary terms, the fact remains that all regulatory provisions have a specific purpose behind their enactment. The very purpose of enacting any legislation is due adherence to the procedures laid down there under to ensure the sound and smooth functioning of the capital market. If no cognizance were to be taken of any breach of these provisions and no liability fixed there upon, the entire purpose of incorporating the provisions in the said enactments would become redundant.
17. Section 15HB reads as under:
“Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.”
18. While adjudging the quantum of penalty, the adjudicating officer is required to have due regard to the factors laid down in Section 15 J of the Act which are as under:-
a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; b) the amount of loss caused to an investor or group of investors as a result of the default; c) the repetitive nature of the default
19. These provisions also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995.
20. It is clear that although EIL may not have enjoyed any gain or unfair advantage as a result of the default, the said default has certainly caused an unquantifiable loss to the investor class as a whole. Moreover, the default is continuing till date. Hence on a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated above as well as after taking into consideration the facts and circumstances of the present case as well as after analysing all the material available on record, the rationale behind the requirement of the appointment of a common share agency, the failure of EIL to appear before the regulator without adequate cause, as well as the mitigating factors, if any, I am inclined to hold that although the penalty need not be imposed in terms of the provision provided in Section 15HB of the Act, the imposition of penalty is very much necessitated.
ORDER:
21. In view of the foregoing, in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, and in the interest of justice, equity and good conscience I think it appropriate to levy a penalty of Rs. 50,000/-(Rupees fifty thousand only) on M/s Eider Infotech Ltd for their failure to appoint a common share agency for demat and physical shares under Regulation 53A of the SEBI (Depositories and Participants) Regulations, 1996.
22. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India” and payable at Mumbai which may be sent to Shri.V.S.Sundaresan, Deputy General Manager, Securities and Exchange Board of India, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
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